Basic-Fit: Predictable Growth Of 20%

Summary

• Basic-Fit is the largest fitness chain in Europe, is growing more than 20% annually and will open more than 100 new fitness clubs in 2018.
• Return On Invested Capital (ROIC) of fitness clubs, which are open more than 3 year, is 35%.
• The low cost subscription based business model ensures stable cash flows and creates a strong moat.
• CEO and founder René Moos owns 22% of the shares of the company.
• This fast growing company seems undervalued based on a Price/FCF ratio of only 15.

Introduction

Basic-Fit (OTCPK:BSFFF) is the largest fitness chain in Europe with 586 fitness clubs at the end of Q3 2018 in The Netherlands, Belgium, Luxembourg, France and Spain according to the Q3 2018 Trading update. On June 10th 2016 Basic-Fit was listed on Euronext Amsterdam with ticker AMS:BFIT and the stock can be traded on the US OTC markets with ticker OTCPK:BSFFF. The stock price has increased from €15 to €27.20 during the 2.5 years after the IPO.

The objective of Basic-fit is to provide affordable high quality fitness facilities and to make fitness accessible to everyone. At the end of Q3 2018 the number of memberships was 1.78 million. This is an increase of 21% year on year. A membership pass gives members access to all fitness clubs in all countries and the fitness pass can be shared by family members. The business model is similar to Planet Fitness (PLNT) in the United States. However, Basic-Fit owns all clubs and does not use a franchise model.

In 2017 Basic-Fit opened 102 new fitness clubs. In 2018 Basic-Fit expects to open at least 100 new clubs. The picture below shows the growth of the number of fitness clubs.

The pipeline of club openings is shown in the picture below. It shows that Basic-Fit is on track to continue to open at least 100 clubs a year. The France market still offers many opportunities to open new fitness clubs. The growth in the Benelux is stabilizing.

Year on Year revenue growth was 22% in Q3 2018.

Competitive Position

Basic-Fit has several sustainable competitive advantages, which include the Basic-Fit brand, lowest cost provider of fitness facilities and economies of scale. Economies of scale include lower relative overhead costs, lower marketing costs, the use of technology and increased buying power to obtain fitness equipment at favorable terms. The location of the fitness clubs is another competitive advantage. Sporters will prefer to visit the closest fitness club to safe time and travel cost and are willing to pay a higher price to do so. Basic-Fit has the biggest network of fitness clubs in the Benelux and France. The competitive advantage of a location close to the customer is explained in the book The Dhandho Investor: The Low-Risk Value Method to High Returns by Mohnish Pabrai. It will be very difficult for a competitor to offer the same service for the same price, because of these competitive advantages.

Profitability

The IFRS net profit of 2017 was only €11 million euro and €6 million for the first 6 months of 2018. These profits don't justify a market valuation of €1.5 billion. However, the IFRS profits are depressed because of depreciation costs of new clubs and additional overhead costs to prepare for further growth. It takes three years for a new club to become mature and to achieve a ROIC above 30%. The reported cash flows offer better insight into the cash generating power of the business. According to the H1 Results 2018 the Free Cash Flow (Adjusted EBITDA - Maintenance Capex) was €46.3 million in H1 2018. I estimate that the FCF will be close to €100 million in 2019. The reported cash flows are shown in the picture below.

As a result, the Price/FCF ratio is about 15. This seems low for a company growing more than 20% annually.

The total equity of Basic-Fit at the end of 2017 was €317 million based on the Annual Report 2017. As a result, the cash flow before capex divided by the total equity is more than 25%. This return is sufficient to finance future growth of 20% without the need to raise equity. These are the characteristics of a compounding stock. Basic-Fit invests all earnings in future growth. It has not paid any dividends or bought back stock, which would destroy value.

Balance sheet

The net debt divided by adjusted EBITDA was 2.7. This was within the debt covenant of 3.5 and enables the financing of future growth. Basic-Fit can raise more debt if adjusted EBITDA continues to grow.

Insider Ownership

CEO and founder René Moos owns 22% of the shares of the company. This high insider ownership ensures that management and shareholder interests are aligned. The British private equity firm 3I Investments PLC (OTCPK:TGOPY) owns 27.8% of the outstanding shares. 3I Investments has a successful track record of accelerating the growth of the companies they have invested in. Pieter de Jong, Partner and Managing Director of 3I Benelux, is a Supervisory Board Member of Basic-Fit.

Risks

The following risks and uncertainties can negatively impact the stock price:

• Increases in interest rates could have a negative impact on cash flows and profit margins, because of the high level of indebtedness. However I believe Basic-Fit has sufficient pricing power to increase prices.
• Competition could increase if other large international fitness club chains will enter the markets of Basic-Fit. This could have a negative impact on profit margins. In my opinion it is very difficult to compete with Basic-Fit in the Benelux and France where Basic-Fit is the market leader.
• Growth will stall if Basic-Fit can not identify new locations for fitness clubs where it can achieve a ROIC of at least 30%. At present there are still many opportunities for growth, especially in France.
• Capital is used for dividend payments or share buy backs instead of opening new fitness clubs. This would destruct value, as long as the cash flow before expansion capex divided by equity is higher than 20%.
• The number of memberships can potentially decrease in a recession. At present, the growth of the number of memberships is stable and predictable. I expect that the impact of a recession on the business is limited. People will continue to go to fitness clubs to stay fit and healthy and Basic-Fit is the lowest cost provider of fitness services.

Conclusion

Basic-Fit is a stock growing 20% a year. Especially the France market still offers high growth opportunities. This growth can probably continue for several years without having to enter new countries or having to raise equity. This fast growing stock seems undervalued based on a price/FCF ratio of only 15. In my opinion the fair value of the Basic-Fit stock is €30-35.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long BSFFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.